Africa faces debt trap
GOVT DEBT HAS RISEN IN AT LEAST 40 COUNTRIES OVER THE PAST DECADE The continent is also battling demands to spend and collapsing currencies.
Highly indebted African countries are facing stark tradeoffs between servicing expensive debt, supporting high and growing development needs, and stabilising domestic currencies. Government debt has risen in at least 40 countries over the past decade. As a result, some are experiencing a bad combination of high debt, elevated development spending needs amid budget shortfalls, and unfavourable exchange rate pressures.
These issues have become more pressing since 2022, when high inflation prompted major central banks worldwide to embark on the most aggressive monetary tightening campaign in decades.
My perspective, shaped by years of researching Africa’s development challenges, is that this presents many countries with a triple set of dilemmas that’s not easy to navigate. Tackling any of one of these issues imperils the others.
Here are some examples:
Stemming the rise in public debt and containing exchange rate decreases would make it more difficult to meet bigger public spending needs;
Pushing for lower public debt while supporting extra spending risks putting more strain on domestic currencies; and
Prioritising higher spending needs and easing currency strains runs the risk of inviting extra government debt.
Steps can be taken to expand the policy space to tackle these challenges while easing difficult trade-offs. These steps include prioritising public spending measures that raise growth, fixing the revenue collection problem facing all African countries, and restructuring unsustainable government debt.
The triple dilemma unfolded as government debts rose substantially over the last decade. Median government debt has more than doubled since 2012 and amounted to 61% of GDP as of 2023.
The debt trends of countries have worsened sharply since 2008. Factors have included the Covid pandemic, which triggered a cost-of-living crisis, and Russia’s invasion of Ukraine.
In Africa, the pain from higher borrowing costs is particularly acute for governments, given that public debt represented nearly 60% of the region’s total external debt in 2022. Nineteen countries, including Ghana and Zambia, are already in debt distress or at high risk of debt distress.
South Africa also faces elevated public debt, which has almost doubled over the last decade and stands at 74% of GDP.
And yet trimming high debts won’t be easy. Development needs are high after coffers were drained by higher spending tied to the pandemic.
Coffers are being depleted by more money being spent repaying expensive loans. This has the additional effect of depleting foreign exchange reserves, which means countries overburdened by debt also have to contend with weakening currencies.
What can be done
A number of steps can be taken to alleviate the trade-offs countries are having to make.
First, governments should prioritise public spending measures that raise growth.
These include critical spending on education, health, infrastructure and other high-quality growth enhancing investments. As economic growth picks up, it is likely to generate more government revenue to pay down the debt.
Second, countries need to fix their revenue collection problems. While growth leads to a larger economy that generates additional revenue, low levels of domestic revenue collection constrain the ability of governments to pay down debt and fund vital social and growth sectors.